Lean hog futures had an up-and-down week, initially rallying on follow-through to last Friday’s strong upward reversals and stronger wholesale pork prices before pulling back toward their recent lows under pressure from ample hog supplies and renewed weakness in pork prices.
After selling off on Thursday, futures stabilized on Friday and technically, the hog market appears to be in the process of forming a significant bottom. Futures fell a long way between late April and last week. July hogs slid $20 and Aug. nearly $21 in less than two months. Notably, market volatility is now back to levels in April when the market was topping. Most-active Aug. futures would need to close below $86.38 to invalidate last Friday’s reversal and we don’t expect that to happen. An Aug. close above $93.00 next week should confirm a major market bottom.
The near-term upside for hog futures does not look large, though. Aug. futures are discount to the CME cash index, which is a negative sign and hog/pork supplies are looking ample to meet demand. The composite pork cutout value has been stuck in a narrow range since mid-April and is now just barely above a year earlier. High hog weights are adding to pork supplies. This week’s estimated hog slaughter of 2.419 million head was 2.2% above a year earlier, but weekly pork production was up 4.7% as the average dressed carcass weight hit 290 pounds, seven above last year.
With Q3 pork production expected to be up about 5% over last year and Q4 production up about 4%, there does not appear to be any relief in sight from supply pressure this year. However, we do expect the June 27 USDA Hogs and Pigs report to show further liquidation of the sow herd. We expect breeding efficiency gains to level off after the sharp increases seen in the previous four quarters. If that is the case, the March-May pig crop may fall slightly below a year earlier.
Hedgers’ Strategy: Hedgers are aside futures.
